EDD Audits: What It Is, How To Prepare And Best Practices For Employers | Perkins Coie

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Presentation of ESD audits

The Washington State Department of Employment Security (ESD) checks the records of employers located in Washington to confirm that wages and hours are being reported accurately and to ensure compliance with laws and regulations. State unemployment insurance.

The US Department of Labor (DOL) requires ESD to perform annual compliance audits, and ESD selects employers to audit based on whether: (1) the employer has an inconsistent reporting pattern; (2) the employer is in an industry with a historically high level of non-compliance; (3) the employer has transferred the ownership or reclassified the type of business; (4) any citizen has submitted fraud reports; or (5) the employer is randomly selected by computer (approximately 10% of total audits). In particular, to be selected for an audit does not means that an employer has broken laws or rules.

If an employer is selected for an audit, ESD auditors will contact the employer by phone, email or letter to inform the employer of the ongoing audit; identify the records to be inspected; and set a mutually acceptable date, place and time to conduct the audit. In addition, ESD will send the employer an appointment confirmation letter, a pre-audit questionnaire and a checklist of files to be completed.

During the audit, ESD auditors will perform a wide variety of functions, including looking for evidence of undeclared employees, casual labor, independent contractors and other workers who provide personal work; sample payroll and time records to compare with wages and hours reported to ESD; and examine the type of business activity and whether a new employer is given the correct tax rate. ESD auditors typically request records going back three years, but if an auditor discovers questionable business practices, the audit may be extended. (RCW 50.24.190). Specifically, ESD auditors typically review: (1) employee payroll, accounting, and time records; (2) business ownership registers and licenses; (3) bank statements, financial statements, check registers, ledgers and invoices; (4) state and federal tax records, including IRS 1099 forms; (5) registration numbers of subcontractors, copies of contracts and invoices; and (6) registration forms for corporate officers. Additionally, ESD auditors examine whether employers have correctly reported independent contractors based on the following tests.

ESD Independent Contractor Tests

One of the most common mistakes employers make when filing UI tax returns each quarter is mistakenly classifying employees as independent contractors. If ESD finds these errors during an audit, the employer must reimburse taxes for any misclassified workers, as well as penalties and interest. Therefore, employers should familiarize themselves with the following tests used by ESD to determine the status of a worker. Simply put, if a worker passes any of the following tests, they are considered independent contractors. If not, the worker is an employee and must be included in the employer’s quarterly unemployment tax report.

Independent contractor test for most industries

First, for all workers except those in the electrical and construction industries, the service rendered by an individual for remuneration is employment (and the worker is considered an employee) unless the employer cannot demonstrate:

  1. The individual is free from any direction and any control over the performance of the service; and
  2. The service is either performed:
    1. Outside the normal course of business for which the service is performed, Where
    2. Outside all the establishments of the company for which the service is provided; and
  3. The individual is usually engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service contract. (RCW 50.04.140(1))

Or, as a separate alternative, the service rendered by a person for remuneration is employment, unless the employer can demonstrate:

  1. The individual is free from any direction and any control over the performance of the service; and
  2. The service is either performed:
    1. Outside the normal course of business for which the service is performed, Where
    2. Outside of all the establishments of the company for which the service is provided, Where
    3. The individual has a principal place of business that qualifies for a federal tax business; and
  3. The individual:
    1. Is usually engaged in a trade, occupation, profession or business of the same nature as that involved in the service contract, Where
    2. Has a primary place of business that is eligible for a federal business tax deduction; and
  4. On the effective date of the service contract, the person is responsible for filing an expense schedule with the Internal Revenue Service (IRS); and
  5. On the effective date of the contract or within a reasonable time after the effective date of the contract, the individual has established:
    1. An active account with the Ministère du Revenu, and
    2. An active account with any other public body as required by the particular case, and
    3. A Unified Commercial Identifier (UBI) number; and
  6. On the effective date of the service contract, the person keeps a separate set of books or records that reflect all of the income and expenses of the business they are conducting. (RCW 50.04.140(2))

Independent contractor test for the electrical and construction industries

Second, for workers in the electrical and construction industries, the ESD uses a slightly different test that incorporates a requirement to register contractors. Specifically, for electricians and construction workers, ESD uses the above six-factor alternative test and, in addition, requires the individual to have a valid contractor registration on the date of entry into force. force of contract under RCW 18.27 or an electrical contractor’s license under RCW 19.28 if the work requires registration or license. (RCW 50.04.145). This means that in addition to meeting the criterion of the six factors above, workers in the electricity or construction sectors must be validly registered as entrepreneurs to be qualified as independent contractors under the law. .

Following the conclusion of an EDD audit

At the end of an audit, the ESD auditor will send a post-audit letter to the employer explaining the audit findings. If the audit results in the employer being liable for taxes, penalties or interest, ESD will send the employer a notice and assessment order detailing the taxes owed, penalties and / or interest payable. to pay.

If an employer does not agree with the NOA, they can file an appeal by writing a letter on the employer’s letterhead requesting an appeal and sending it to ESD-Tax Appeals, or a administrative hearings office (OAH). ESD must receive the letter within 30 days of the date of the notice of intent. Appeal hearings are usually conducted by telephone by the HAO, and decisions are usually rendered approximately two weeks after the hearing ends. If the findings of the ESD are reversed, the ESD will adjust the employer’s account based on the findings of the OAH. If the ESD’s findings are upheld and the employer disagrees, the employer can file a request for review with the Commissioner’s Review Office (CRO). The request for review must be in writing, must be sent to the Records Center of the Department of Employment Security, PO Box 9555, MS-6000, Olympia, WA, 98507-9555, and must be stamped and sent within 30 days following the date of dispatch by OAH. its decision to the employer. If an employer disagrees with the CRO’s decision, they can file a written appeal with the Washington State Superior Court within 30 days.

Good practices and pitfalls to avoid

  1. Understand the legal standards for the liability of independent contractors (listed above);
  2. Have independent contractors sign independent contractual agreements which, among other things, explicitly waive control and direction of the worker and do not bind the contractors to company policies;
  3. Ensure that independent contractors have their own business entity / license, perform independent contractor work for other entities, and do not mention the company as their employer on a resume, website or platform social media such as LinkedIn;
  4. Keep for at least three years the documents establishing the independent contractor relationship such as the contract, invoices (with description of services that are not part of the company’s activities, etc.); and
  5. If contacted by ESD for an audit, employers should respond promptly to all letters, phone calls, questions and requests for information; have an employer representative during the audit who is familiar with the employer’s operations and payroll records; provide an on-site work area that is private or out of sight of the customer to perform the audit; and ensure that the requested records are well organized and can be easily identified by the auditor.

Finally, employers should consult a trusted legal advisor if they have any questions or concerns about the EDD audit process or whether workers qualify as independent contractors or employees.

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